Defining ETFs for traders and investors.

I’m increasingly coming across day traders and investors talking about ETFs, explaining which ones they are investing in and why.




(Steve Wagner Twitter)¹



For years I thought an ETF was a complex wall-street term that sounded totally alien to me. Coincidentally, it also reminded me of E.T – the extra-terrestrial – just because of the name.

It turns out ETFs can be more useful to know about than I first thought, so let’s define what an ETF is and name a few.

It’s also important to mention that it is possible to day trade or invest in ETFs using TradeZero.²

What is an ETF?

An ETF could be defined as a basket of securities grouped together for a specific reason. For example, a basket of gold-related securities or securities all operating on the Nasdaq. But there are endless official definitions of ETFs on other financial websites, such as Seeking Alpha³, who describe it as:

“ ETF, or exchange-traded fund, is an investment security that combines some of the attributes of stocks and mutual funds. Like stocks, ETFs trade intra-day on an exchange. Like with mutual funds, many ETFs seek to track the performance of a benchmark index, such as the S&P 500.”

How is an ETF different than an index fund?

An example of an index fund is the S&P 500 index which tracks the performance of the top 500 U.S. companies or the Nasdaq 100.

As Investopedia reports⁴: “The main difference between an ETF and an index fund is ETFs can be traded (bought and sold) during the day and index funds can only be traded at the set price point at the end of the trading day.”

Some ETFs pay dividends

Dividends: When investing in an ETF (a basket of securities) it is worth noting most will pay a dividend % as result.

Generally, if the ETF pays a dividend it can often be identified quite quickly by having the word ‘dividend’ in the ETF fund name. This usually means it is seeking to pay them out regularly.

Diversified: Investing in a basket of securities means the investor’s risk is spread across all of the companies in that basket rather than one individual company.

Top Dividend paying ETFs.

According to BankRate⁵, here are some of the most widely held ETFs that pay dividends currently on the market.

Vanguard Dividend Appreciation ETF (VIG)

VIG tracks the performance of the NASDAQ U.S. Dividend Achievers Select Index. The investment strategy focuses on dividend growth, selecting companies that have consistently increased dividend payments for at least a decade.

Vanguard High Dividend Yield ETF (VYM)

VYM tracks the performance of the FTSE High Dividend Yield Index. The index selects high-yield dividend-paying companies based in the U.S., excluding REITs (real estate investment trusts)⁶.

Schwab US Dividend Equity ETF (SCHD)

SCHD seeks to track the performance of the Dow Jones U.S. Dividend 100 Index, which includes companies with strong financial performance. The low-cost fund holds companies based on the quality and sustainability of their dividends and consists of many household names.

Crypto and ETFs


A number of Crypto ETFs have recently popped up that enable traders or investors to gain exposure to the currency without actually having to buy a coin. Below is a breakdown of two of the more popular Crypto ETFs reported in U.S News⁷:

ProShares Bitcoin Strategy ETF (ticker: BITO⁸)

ProShares Bitcoin Strategy ETF is the first Bitcoin-linked ETF in the U.S., having started trading in October 2021. This ETF allows investors to add exposure to Bitcoin⁹ without directly owning the cryptocurrency. BITO does not directly invest in Bitcoin. Rather, the fund aims to provide returns through exposure to Bitcoin futures¹⁰ contracts.

Grayscale Bitcoin Trust (GBTC¹¹)

The Grayscale Bitcoin Trust is one of the first investment vehicles to derive value solely from the price of Bitcoin.¹²

Looking at other ETFs

ETFs can span various sectors and even currencies, see more info here from Seeking Alpha:¹³

Fixed-Income ETFs:
Also known as bond ETFs, these funds track bond market indices, such as the Bloomberg Barclays US Aggregate Bond Index. Other common fixed-income ETF categories include government bond, corporate bond, tax-free municipal bond, international bond, emerging markets bond, and high-yield bond.

Commodity ETFs: Rather than hold the physical asset, which can be inaccessible or impractical for an investor, commodity ETFs track the price of a commodity, such as gold, grains or oil, or a basket of commodities, such as precious metals or agricultural ETFs.

Currency ETFs:
As is the case with commodities, currency ETFs provide exposure to currency markets and foreign exchange trading (Forex) that may otherwise be inaccessible to the everyday investor. Currency ETFs may hold cash deposits in the currency being tracked or use futures contracts on the underlying currency.

In Summary

  • The main difference between an ETF and an index fund is ETFs can be traded (bought and sold) during the day and index funds can only be traded at the set price point at the end of the trading day.
  • When buying an ETF investors are buying a basket of securities compared to buying a stock which is one individual security.
  • An ETF enables the investor to spread risk across a number of securities rather than being invested in one company.
  • Investors can look into ETFs across various sectors, now including cryptocurrencies.

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References

  1. Twitter: June 16, 2022 [https://twitter.com/SteveWagsInvest/status/1521677716373843968]
  2. TradeZero: June 8, 2022 [https://www.tradezero.ca/]
  3. Seeking Alpha: June 8, 2022 [Exchange Traded Fund (ETF): What It Is & How It Works | Seeking Alpha]
  4. Investopedia: June 8, 2022 [Index Fund vs. ETF: What's the Difference? (investopedia.com)]
  5. BankRate: June 8, 2022 [Best Dividend ETFs And How To Invest In Them | Bankrate]
  6. BankRate: June 8, 2022 [What Is A REIT? | Bankrate]
  7. U.S. News: June 8, 2022 [7 Best Cryptocurrency ETFs to Buy | Investing | US News]
  8. U.S. News: June 8, 2022 [ProShares Bitcoin Strategy ETF (BITO) (usnews.com)]
  9. U.S. News: June 8, 2022 [The History of Bitcoin, the First Cryptocurrency | Cryptocurrency | US News]
  10. U.S. News: June 8, 2022 [Futures Definition | U.S. News (usnews.com)]
  11. U.S. News: June 8, 2022 [Grayscale Bitcoin Trust (BTC) (GBTC) (usnews.com)]
  12. U.S News: June 8, 2022 [https://money.usnews.com/investing/articles/the-history-of-bitcoin]
  13. Seeking Alpha: June 8, 2022 [Exchange Traded Fund (ETF): What It Is & How It Works | Seeking Alpha]